Intrinsic value of Bank of Montreal - BMO

Previous Close

$78.97

  Intrinsic Value

$35.87

stock screener

  Rating & Target

str. sell

-55%

Previous close

$78.97

 
Intrinsic value

$35.87

 
Up/down potential

-55%

 
Rating

str. sell

Our model is not good at valuating stocks of financial companies, such as BMO.

We calculate the intrinsic value of BMO stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Shares outstanding, mln

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2017(a)
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046
   2047

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -100.00
  9.90
  9.41
  8.97
  8.57
  8.21
  7.89
  7.60
  7.34
  7.11
  6.90
  6.71
  6.54
  6.38
  6.25
  6.12
  6.01
  5.91
  5.82
  5.74
  5.66
  5.60
  5.54
  5.48
  5.43
  5.39
  5.35
  5.32
  5.28
  5.26
  5.23
Revenue, $m
  0
  18,979
  20,765
  22,627
  24,566
  26,585
  28,683
  30,864
  33,131
  35,486
  37,934
  40,479
  43,125
  45,878
  48,744
  51,727
  54,835
  58,075
  61,453
  64,978
  68,657
  72,499
  76,512
  80,707
  85,093
  89,680
  94,480
  99,503
  104,762
  110,268
  116,036
Variable operating expenses, $m
 
  8,275
  9,053
  9,865
  10,711
  11,591
  12,506
  13,457
  14,445
  15,472
  16,539
  17,649
  18,803
  20,003
  21,252
  22,553
  23,908
  25,321
  26,794
  28,330
  29,934
  31,609
  33,359
  35,188
  37,101
  39,101
  41,193
  43,383
  45,676
  48,077
  50,592
Fixed operating expenses, $m
 
  4,162
  4,253
  4,347
  4,442
  4,540
  4,640
  4,742
  4,846
  4,953
  5,062
  5,173
  5,287
  5,403
  5,522
  5,644
  5,768
  5,895
  6,025
  6,157
  6,293
  6,431
  6,572
  6,717
  6,865
  7,016
  7,170
  7,328
  7,489
  7,654
  7,822
Total operating expenses, $m
  0
  12,437
  13,306
  14,212
  15,153
  16,131
  17,146
  18,199
  19,291
  20,425
  21,601
  22,822
  24,090
  25,406
  26,774
  28,197
  29,676
  31,216
  32,819
  34,487
  36,227
  38,040
  39,931
  41,905
  43,966
  46,117
  48,363
  50,711
  53,165
  55,731
  58,414
Operating income, $m
  0
  6,542
  7,458
  8,415
  9,413
  10,454
  11,537
  12,665
  13,839
  15,061
  16,333
  17,657
  19,035
  20,472
  21,969
  23,530
  25,159
  26,859
  28,635
  30,490
  32,430
  34,458
  36,581
  38,802
  41,128
  43,564
  46,116
  48,792
  51,596
  54,537
  57,622
EBITDA, $m
  648
  64,959
  71,371
  78,060
  85,029
  92,281
  99,824
  107,665
  115,816
  124,287
  133,094
  142,250
  151,775
  161,685
  172,002
  182,746
  193,942
  205,614
  217,788
  230,493
  243,756
  257,610
  272,086
  287,219
  303,044
  319,600
  336,925
  355,062
  374,053
  393,944
  414,782
Interest expense (income), $m
  4,312
  13,748
  13,545
  15,432
  17,399
  19,449
  21,581
  23,798
  26,102
  28,497
  30,985
  33,572
  36,260
  39,056
  41,965
  44,992
  48,145
  51,428
  54,851
  58,420
  62,144
  66,031
  70,090
  74,331
  78,763
  83,396
  88,243
  93,314
  98,621
  104,177
  109,995
Earnings before tax, $m
  4,919
  -7,206
  -6,087
  -7,017
  -7,986
  -8,995
  -10,044
  -11,133
  -12,263
  -13,436
  -14,653
  -15,915
  -17,225
  -18,584
  -19,996
  -21,462
  -22,985
  -24,569
  -26,216
  -27,930
  -29,714
  -31,573
  -33,510
  -35,529
  -37,635
  -39,833
  -42,127
  -44,522
  -47,024
  -49,639
  -52,372
Tax expense, $m
  959
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Net income, $m
  3,958
  -7,206
  -6,087
  -7,017
  -7,986
  -8,995
  -10,044
  -11,133
  -12,263
  -13,436
  -14,653
  -15,915
  -17,225
  -18,584
  -19,996
  -21,462
  -22,985
  -24,569
  -26,216
  -27,930
  -29,714
  -31,573
  -33,510
  -35,529
  -37,635
  -39,833
  -42,127
  -44,522
  -47,024
  -49,639
  -52,372

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  525,195
  412,579
  451,403
  491,889
  534,054
  577,926
  623,544
  670,959
  720,232
  771,435
  824,651
  879,973
  937,503
  997,352
  1,059,642
  1,124,503
  1,192,072
  1,262,500
  1,335,942
  1,412,564
  1,492,542
  1,576,061
  1,663,314
  1,754,506
  1,849,851
  1,949,573
  2,053,910
  2,163,108
  2,277,427
  2,397,139
  2,522,528
Adjusted assets (=assets-cash), $m
  525,195
  412,579
  451,403
  491,889
  534,054
  577,926
  623,544
  670,959
  720,232
  771,435
  824,651
  879,973
  937,503
  997,352
  1,059,642
  1,124,503
  1,192,072
  1,262,500
  1,335,942
  1,412,564
  1,492,542
  1,576,061
  1,663,314
  1,754,506
  1,849,851
  1,949,573
  2,053,910
  2,163,108
  2,277,427
  2,397,139
  2,522,528
Revenue / Adjusted assets
  0.000
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
  0.046
Average production assets, $m
  3,152
  584,162
  639,132
  696,456
  756,157
  818,274
  882,864
  949,997
  1,019,762
  1,092,259
  1,167,607
  1,245,937
  1,327,392
  1,412,131
  1,500,326
  1,592,161
  1,687,831
  1,787,548
  1,891,533
  2,000,021
  2,113,261
  2,231,513
  2,355,053
  2,484,170
  2,619,167
  2,760,362
  2,908,090
  3,062,702
  3,224,563
  3,394,061
  3,571,597
Working capital, $m
  0
  -560,002
  -612,699
  -667,652
  -724,883
  -784,432
  -846,350
  -910,707
  -977,586
  -1,047,086
  -1,119,317
  -1,194,407
  -1,272,494
  -1,353,728
  -1,438,276
  -1,526,312
  -1,618,026
  -1,713,619
  -1,813,303
  -1,917,304
  -2,025,861
  -2,139,222
  -2,257,653
  -2,381,429
  -2,510,843
  -2,646,199
  -2,787,817
  -2,936,034
  -3,091,202
  -3,253,689
  -3,423,883
Total debt, $m
  80,206
  250,834
  285,775
  322,213
  360,162
  399,646
  440,702
  483,376
  527,721
  573,804
  621,699
  671,489
  723,266
  777,130
  833,191
  891,565
  952,378
  1,015,763
  1,081,860
  1,150,820
  1,222,801
  1,297,968
  1,376,495
  1,458,568
  1,544,378
  1,634,129
  1,728,032
  1,826,310
  1,929,197
  2,036,938
  2,149,788
Total liabilities, $m
  492,366
  371,321
  406,262
  442,700
  480,649
  520,133
  561,190
  603,863
  648,209
  694,292
  742,186
  791,976
  843,753
  897,617
  953,678
  1,012,052
  1,072,865
  1,136,250
  1,202,347
  1,271,308
  1,343,288
  1,418,455
  1,496,983
  1,579,055
  1,664,866
  1,754,616
  1,848,519
  1,946,797
  2,049,684
  2,157,425
  2,270,275
Total equity, $m
  32,829
  41,258
  45,140
  49,189
  53,405
  57,793
  62,354
  67,096
  72,023
  77,144
  82,465
  87,997
  93,750
  99,735
  105,964
  112,450
  119,207
  126,250
  133,594
  141,256
  149,254
  157,606
  166,331
  175,451
  184,985
  194,957
  205,391
  216,311
  227,743
  239,714
  252,253
Total liabilities and equity, $m
  525,195
  412,579
  451,402
  491,889
  534,054
  577,926
  623,544
  670,959
  720,232
  771,436
  824,651
  879,973
  937,503
  997,352
  1,059,642
  1,124,502
  1,192,072
  1,262,500
  1,335,941
  1,412,564
  1,492,542
  1,576,061
  1,663,314
  1,754,506
  1,849,851
  1,949,573
  2,053,910
  2,163,108
  2,277,427
  2,397,139
  2,522,528
Debt-to-equity ratio
  2.443
  6.080
  6.330
  6.550
  6.740
  6.920
  7.070
  7.200
  7.330
  7.440
  7.540
  7.630
  7.710
  7.790
  7.860
  7.930
  7.990
  8.050
  8.100
  8.150
  8.190
  8.240
  8.280
  8.310
  8.350
  8.380
  8.410
  8.440
  8.470
  8.500
  8.520
Adjusted equity ratio
  0.063
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100
  0.100

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  3,958
  -7,206
  -6,087
  -7,017
  -7,986
  -8,995
  -10,044
  -11,133
  -12,263
  -13,436
  -14,653
  -15,915
  -17,225
  -18,584
  -19,996
  -21,462
  -22,985
  -24,569
  -26,216
  -27,930
  -29,714
  -31,573
  -33,510
  -35,529
  -37,635
  -39,833
  -42,127
  -44,522
  -47,024
  -49,639
  -52,372
Depreciation, amort., depletion, $m
  648
  58,416
  63,913
  69,646
  75,616
  81,827
  88,286
  95,000
  101,976
  109,226
  116,761
  124,594
  132,739
  141,213
  150,033
  159,216
  168,783
  178,755
  189,153
  200,002
  211,326
  223,151
  235,505
  248,417
  261,917
  276,036
  290,809
  306,270
  322,456
  339,406
  357,160
Funds from operations, $m
  -1,043
  51,210
  57,826
  62,629
  67,629
  72,832
  78,243
  83,867
  89,713
  95,790
  102,108
  108,679
  115,514
  122,629
  130,037
  137,754
  145,798
  154,186
  162,937
  172,072
  181,612
  191,578
  201,996
  212,888
  224,282
  236,204
  248,683
  261,748
  275,432
  289,767
  304,787
Change in working capital, $m
  -3,195
  -50,446
  -52,696
  -54,953
  -57,232
  -59,548
  -61,918
  -64,357
  -66,879
  -69,499
  -72,232
  -75,090
  -78,086
  -81,235
  -84,547
  -88,036
  -91,714
  -95,593
  -99,684
  -104,001
  -108,556
  -113,362
  -118,431
  -123,777
  -129,414
  -135,356
  -141,618
  -148,217
  -155,167
  -162,487
  -170,194
Cash from operations, $m
  2,152
  101,656
  110,522
  117,582
  124,861
  132,381
  140,161
  148,224
  156,592
  165,290
  174,340
  183,768
  193,601
  203,863
  214,584
  225,790
  237,512
  249,779
  262,622
  276,073
  290,168
  304,940
  320,426
  336,665
  353,695
  371,560
  390,301
  409,965
  430,599
  452,254
  474,981
Maintenance CAPEX, $m
  0
  -53,155
  -58,416
  -63,913
  -69,646
  -75,616
  -81,827
  -88,286
  -95,000
  -101,976
  -109,226
  -116,761
  -124,594
  -132,739
  -141,213
  -150,033
  -159,216
  -168,783
  -178,755
  -189,153
  -200,002
  -211,326
  -223,151
  -235,505
  -248,417
  -261,917
  -276,036
  -290,809
  -306,270
  -322,456
  -339,406
New CAPEX, $m
  -585
  -52,608
  -54,970
  -57,324
  -59,701
  -62,117
  -64,590
  -67,133
  -69,765
  -72,498
  -75,348
  -78,329
  -81,455
  -84,739
  -88,195
  -91,834
  -95,671
  -99,717
  -103,985
  -108,488
  -113,240
  -118,252
  -123,540
  -129,117
  -134,997
  -141,195
  -147,728
  -154,611
  -161,862
  -169,497
  -177,536
Cash from investing activities, $m
  -2,335
  -105,763
  -113,386
  -121,237
  -129,347
  -137,733
  -146,417
  -155,419
  -164,765
  -174,474
  -184,574
  -195,090
  -206,049
  -217,478
  -229,408
  -241,867
  -254,887
  -268,500
  -282,740
  -297,641
  -313,242
  -329,578
  -346,691
  -364,622
  -383,414
  -403,112
  -423,764
  -445,420
  -468,132
  -491,953
  -516,942
Free cash flow, $m
  -183
  -4,107
  -2,863
  -3,655
  -4,485
  -5,352
  -6,256
  -7,196
  -8,172
  -9,184
  -10,234
  -11,322
  -12,448
  -13,615
  -14,824
  -16,077
  -17,375
  -18,721
  -20,118
  -21,568
  -23,074
  -24,638
  -26,265
  -27,957
  -29,718
  -31,553
  -33,463
  -35,455
  -37,532
  -39,700
  -41,961
Issuance/(repayment) of debt, $m
  2,955
  -3,767
  34,941
  36,438
  37,949
  39,485
  41,056
  42,673
  44,346
  46,083
  47,895
  49,790
  51,777
  53,864
  56,061
  58,374
  60,813
  63,385
  66,098
  68,960
  71,980
  75,167
  78,528
  82,073
  85,810
  89,751
  93,903
  98,278
  102,887
  107,740
  112,850
Issuance/(repurchase) of shares, $m
  81
  48,464
  9,969
  11,066
  12,203
  13,382
  14,605
  15,874
  17,190
  18,556
  19,974
  21,447
  22,978
  24,569
  26,225
  27,948
  29,742
  31,612
  33,560
  35,592
  37,712
  39,925
  42,235
  44,648
  47,169
  49,805
  52,560
  55,442
  58,456
  61,610
  64,911
Cash from financing (excl. dividends), $m  
  2,965
  44,697
  44,910
  47,504
  50,152
  52,867
  55,661
  58,547
  61,536
  64,639
  67,869
  71,237
  74,755
  78,433
  82,286
  86,322
  90,555
  94,997
  99,658
  104,552
  109,692
  115,092
  120,763
  126,721
  132,979
  139,556
  146,463
  153,720
  161,343
  169,350
  177,761
Total cash flow (excl. dividends), $m
  2,188
  40,590
  42,047
  43,848
  45,666
  47,515
  49,406
  51,352
  53,364
  55,455
  57,635
  59,915
  62,306
  64,819
  67,462
  70,246
  73,180
  76,275
  79,540
  82,984
  86,619
  90,453
  94,498
  98,763
  103,261
  108,003
  113,000
  118,265
  123,811
  129,651
  135,801
Retained Cash Flow (-), $m
  -1,518
  -48,464
  -9,969
  -11,066
  -12,203
  -13,382
  -14,605
  -15,874
  -17,190
  -18,556
  -19,974
  -21,447
  -22,978
  -24,569
  -26,225
  -27,948
  -29,742
  -31,612
  -33,560
  -35,592
  -37,712
  -39,925
  -42,235
  -44,648
  -47,169
  -49,805
  -52,560
  -55,442
  -58,456
  -61,610
  -64,911
Prev. year cash balance distribution, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  -7,874
  32,078
  32,782
  33,463
  34,132
  34,800
  35,477
  36,174
  36,899
  37,661
  38,468
  39,329
  40,249
  41,237
  42,298
  43,438
  44,663
  45,980
  47,392
  48,907
  50,528
  52,263
  54,115
  56,092
  58,198
  60,440
  62,823
  65,355
  68,041
  70,889
Discount rate, %
 
  13.70
  14.39
  15.10
  15.86
  16.65
  17.49
  18.36
  19.28
  20.24
  21.25
  22.32
  23.43
  24.60
  25.83
  27.13
  28.48
  29.91
  31.40
  32.97
  34.62
  36.35
  38.17
  40.08
  42.08
  44.18
  46.39
  48.71
  51.15
  53.71
  56.39
PV of cash for distribution, $m
 
  -6,925
  24,517
  21,496
  18,571
  15,801
  13,234
  10,903
  8,829
  7,023
  5,482
  4,196
  3,145
  2,306
  1,653
  1,156
  788
  523
  337
  211
  128
  75
  43
  23
  12
  6
  3
  1
  1
  0
  0
Current shareholders' claim on cash, %
  100
  50.0
  40.3
  32.3
  25.9
  20.7
  16.5
  13.2
  10.5
  8.3
  6.6
  5.3
  4.2
  3.3
  2.6
  2.1
  1.6
  1.3
  1.0
  0.8
  0.6
  0.5
  0.4
  0.3
  0.2
  0.2
  0.2
  0.1
  0.1
  0.1
  0.1

Bank of Montreal (the Bank) is a financial services provider. The Bank provides a range of personal and commercial banking, wealth management and investment banking products and services. The Bank conducts its business through three operating groups: Personal and Commercial Banking (P&C), Wealth Management and BMO Capital Markets. The P&C business includes two retail and business banking operating segments, such as Canadian Personal and Commercial Banking (Canadian P&C), and the United States Personal and Commercial Banking (U.S. P&C). The Bank's Wealth Management business serves a range of client segments, from mainstream to ultra-high net worth and institutional, with an offering of wealth management products and services, including insurance. BMO Capital Markets is a North American-based financial services provider offering a range of products and services to corporate, institutional and government clients. The Bank has over 1,500 bank branches in Canada and the United States.

FINANCIAL RATIOS  of  Bank of Montreal (BMO)

Valuation Ratios
P/E Ratio 12.9
Price to Sales 0
Price to Book 1.6
Price to Tangible Book
Price to Cash Flow 23.8
Price to Free Cash Flow 32.6
Growth Rates
Sales Growth Rate -100%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 27.5%
Cap. Spend. - 3 Yr. Gr. Rate 1.4%
Financial Strength
Quick Ratio NaN
Current Ratio NaN
LT Debt to Equity 244.3%
Total Debt to Equity 244.3%
Interest Coverage 2
Management Effectiveness
Return On Assets 1.4%
Ret/ On Assets - 3 Yr. Avg. 1.3%
Return On Total Capital 3.7%
Ret/ On T. Cap. - 3 Yr. Avg. 3.6%
Return On Equity 12.3%
Return On Equity - 3 Yr. Avg. 11.8%
Asset Turnover 0
Profitability Ratios
Gross Margin 0%
Gross Margin - 3 Yr. Avg. 0%
EBITDA Margin 0%
EBITDA Margin - 3 Yr. Avg. 0%
Operating Margin 0%
Oper. Margin - 3 Yr. Avg. 0%
Pre-Tax Margin 0%
Pre-Tax Margin - 3 Yr. Avg. 0%
Net Profit Margin 0%
Net Profit Margin - 3 Yr. Avg. 0%
Effective Tax Rate 19.5%
Eff/ Tax Rate - 3 Yr. Avg. 18.7%
Payout Ratio 37.6%

BMO stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the BMO stock intrinsic value calculation we used $17269 million for the last fiscal year's total revenue generated by Bank of Montreal. The default revenue input number comes from 2017 income statement of Bank of Montreal. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our BMO stock valuation model: a) initial revenue growth rate of 9.9% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 13.7%, whose default value for BMO is calculated based on our internal credit rating of Bank of Montreal, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of Bank of Montreal.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of BMO stock the variable cost ratio is equal to 43.6%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $4072 million in the base year in the intrinsic value calculation for BMO stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 5.4% for Bank of Montreal.

Corporate tax rate of 27% is the nominal tax rate for Bank of Montreal. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the BMO stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for BMO are equal to 3078%.

Life of production assets of 10 years is the average useful life of capital assets used in Bank of Montreal operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for BMO is equal to -2950.7%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $0 million for Bank of Montreal - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 766 million for Bank of Montreal is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of Bank of Montreal at the current share price and the inputted number of shares is $60.5 billion.

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Financial statements of BMO
Valuation of Stocks

The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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